In New Jersey, the recent boom in solar installations, a consequence of the unintended overlapping federal and state incentives, has created an overbuild scenario in which there is more than enough solar capacity to meet current state mandates. Thats what Jamie Hahn, managing director at Solis Partners, a leading developer and integrator of commercial solar power systems based in Manasquan, N.J., had to say during a panel discussion on the New Jersey solar market at the Distributed Solar Summit that was held recently in San Diego, Calif. The program provided an examination of distributed solar markets, looking at two of the leading markets, California and New Jersey, as well as emerging markets in the Northeast, West and Midwest.
New Jersey ranks second in the nation after California in solar capacity, but recently surpassed California to become the nations leading commercial solar market. The large build out in New Jerseys solar market has been attributed to various federal and state incentives. On the federal level these include the 1603 Treasury Grant Program, which allows system owners to recoup 30 percent of the project cost, and the 100 percent bonus depreciation allowance, which allows them to depreciate 100 percent of the eligible costs in the first year. Both are set to expire at the end of 2011.
On the state level, producers of solar electricity are rewarded through the states Solar Renewable Energy Certificate (SREC) program. An SREC, which represents the environmental benefit of solar, is the equivalent of 1,000 kilowatt-hours of electricity. In New Jersey, utilities are required to produce a certain amount of electricity from renewable energy, which is known as the Renewable Portfolio Standard (RPS).
If the goal is not met, they must pay a penalty known as a Solar Alternative Compliance Payment (SACP), which functions as a ceiling on SREC prices. These incentives combined with reduced capital costs have enabled New Jersey to meet its RPS mandates not only for the current energy 2012, but for energy year 2013 and probably 2014, said Hahn. This has affected the supply of SRECs, thus lowering their prices. SREC values have decoupled from the SACP and the market-based mechanism has taken hold, Hahn said. The problem is that the overbuild happened quicker than anyone realized.
A proposed legislative reform and stabilization package, now under consideration in the State Legislature, would shift the statutory RPS schedule and at the same time reduce the Solar Alternative Compliance Payment (SACP). This RPS injection would increase demand for SRECs — starting in energy year 2013, which would provide the foundation for the solar industry to continue to develop and grow at a sustainable rate. The increase in the RPS would absorb the current overbuild and create continuing, albeit more modest, demand for new product for business continuity purposes, said Hahn. If we fail to take action to promote added capacity, we will see significant job loss within the sector.
Another proposed solution would be to focus on behind-the-meter as opposed to direct grid-feed projects. New Jersey is a very congested state with limited open land as compared to other markets, Hahn said. Net metered applications provide the greatest net economic benefit to the ratepayers because the power is generated onsite where it is needed the most. Behind-the-meter projects enable commercial and industrial users to reduce peak demand and lower their operating costs, Hahn said. New Jersey has some of the nations highest electricity rates. With distributed solar, businesses can reduce their energy costs to the point that they are comparable to costs in other regions and states, allowing New Jersey to retain jobs and attract new businesses by facilitating economic growth. Hahn also said that the state needs to limit project sizes.
In this market, large utility scale projects will get the New Jersey market right back into the same overbuilt scenario that it is facing today. One 20-megawatt project can decimate the SREC market overnight, he said. The market needs a way to better monitor itself regarding the overall level of development and construction activity statewide. He also spoke of the need for the continuation and evolution of long-term utility SREC finance programs. These create the necessary certainty that will allow the financial community to invest, said Hahn. By placing a greater reliance on competitive market forces, we will be able to stimulate growth, thus continuing to drive down project costs.
In addition, Hahn spoke of the expiring 1603 Treasury Grant Program and the impact on the market, namely that system owners will need to monetize approximately twice the amount of the project cost with tax equity and that the expiration will restrict the markets ability to leverage private sector capital to finance new projects. Financing for the distributed solar sector will look quite different in 2012 compared to the past three years once the cash grant is gone, but different does not mean bad, Hahn noted. As a result of the decline in the value of these various incentives and expirations, the electricity becomes a much more important component in the overall project, whereas a year ago it was all about SRECs."
